Accounting for Leases: Differences between Romanian Regulations and IAS 17

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Procedia Economics and Finance 15 ( 2014 ) 1310 – 1315

Selection and peer-review under responsibility of the Emerging Markets Queries in Finance and Business local organization doi: 10.1016/S2212-5671(14)00593-0

ScienceDirect

Emerging Markets Queries in Finance and Business

Accounting for Leases: Differences between Romanian

Regulations and IAS 17

Ina Mitu

a,

*, Adriana Tiron Tduor

a

, Szilveszter Fekete Pali-Pista

a

a _{Babes-Bolyai University, Faculty of Economics and Business Administration, Teodor Mihali 58-60, Cluj-Napoca, 400591, Romania}

Abstract

International accounting harmonization represents a complex process that plays an important role in the accounting profession. This research provides a comparative analysis and the measurement of formal harmonization of lease accounting treatment proposed by two sets of accounting regulations: the Romanian legislation (the Ministry of Public Finance Order no. 3055/2009) and the International Accounting Standard (IAS) 17 Leases, both valid on 31.12.2011. In this respect, the research methodology is based on closely analysing the regulations mentioned above and determining the similarity and dissimilarity coefficients, in order to assess the progress of national accounting regulations in converging with the International Accounting Standard. This study provides statistical evidence that the level of convergence between the national and international accounting treatment for lease transactions achieved in 2011 is 22% in terms of complexity and requirements imposed by the six criteria analysed in the research. In addition, by calculating the coefficients of similarity and dissimilarity for each criterion, the study demonstrates that the recognition of a financial lease is the criterion with the greatest similarity coefficients and the lease disclosure differs totally in the two regulations. This study contributes to the development of lease accounting and literature in the field, considering that it is a topic that is very much debated in the later years by the inclusion in the agendas of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) of a joint project regarding accounting for these transactions.

Keywords: lease accounting; formal harmonization; national and international regulations.

* Corresponding author. Tel.: +40-264-418-652; fax: +40-264-412-570. E-mail address: ina.mitu@econ.ubbcluj.ro

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1.Introduction

Leasing is a concept gradually becoming an important research topic in the international literature and has incited economic and financial environment with its advantages and new perspectives. IAS 17 Leases has been published by the International Accounting Standards Board (IASB) in December 1997, replacing IAS 17 Accounting for Leases, published in 1982. In December 2003 IASB issued the revised IAS 17. The objective of this standard is to establish for the lessees and the lessors, the appropriate accounting policies and issues that should be highlighted regarding the finance and operating leasing. The lease accounting is at the heart of the debate in the international accounting environment for some time now. In July 2006, IASB and FASB initiated a joined project on leases to promote international convergence of this accounting standard. In Romania the regulation dealing with lease accounting is the Ministry of Public Finance Order (MPFO) no. 3055/2009 regarding the approval of the accounting regulations in compliance with the European Union directives.

The formal harmonization is a current issue in the accounting area of research. In the light of an in-depth empirical research this study aims to measure the degree of formal harmonization of regulations on lease accounting (IAS 17 and MPFO 3055/2009) valid on 31.12.2011. To achieve the objective, the study uses the similarity and dissimilarity coefficients. These coefficients determine the degree of similarity and dissimilarity between the analysed elements.

2.Lease Accounting: Background Research Findings and the State of Convergence

By reviewing the international literature it can be observed the complexity and the variety of leasing transactions, and also the differences in the regulations of different countries. In this context, it is explained the diversity of definitions of the lease term (Jensen & Smith, 1984; Quirke, 1996; Terry, 1997; Fabozzi & Choudhry, 2004). Recent studies about leasing operations analyse and provide evidence of the most attractive option between: leasing and debt (Lin et al., 2012), leasing and selling (Qian & Burritt, 2011), leasing and buying an asset (Wong et al., 2010).

The criticism of the accounting model for leases that is currently adopted is highlighted increasingly more and more in the latest researches (De Martino, 2011; Knubley, 2010; Lyon, 2010), and especially through the two special reports published by working group G4+1 in 1996 and 1999 (McGregor, 1996). These reports analyse the weaknesses in accounting standards on lease transactions, and proposes an alternative and innovative accounting approach, consisting in reporting the operating leases in the balance sheet at fair value by presenting the relevant assets and liabilities (Lipe, 2001; Ryan, 2001). One such study that provides valuable and timely information for IASB’s and FASB’s decisions on accounting for leases is realised by Duke et al. (2009). The study presents empirical evidence that, even in the post-Enron era, companies can still use operating leases to hide billions of assets and liabilities from investors. Furthermore, by reporting leases as operating instead of as financial leases, they can also enhance retained earnings, and improve significantly other key financial indicators. The results indicate that, by reporting operating leases, the 366 companies that are included in the sample (contained in the 2003 S&P 500 index) have avoided 11% of total liabilities and 4% of total assets.

In July 2006 IASB and FASB initiated a joint project to develop a new single approach to lease accounting that would eliminate the existing distinction between operating leases and finance leases, and would ensure that all assets and liabilities arising under leases are recognized in the balance sheet. Accordingly, in March 2009 the IASB and the FASB have issued a Discussion Paper Leases: Preliminary Views. Thereafter, in August 2010 the boards published an Exposure Draft Leases in which they present their proposal for recording all leases for the same way. The convergence efforts of IASB and FASB on lease accounting continue to present challenges. In July 2011, the boards agreed unanimously to re-expose the revised proposals for a common standard for lease accounting.

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3.Research Methodology

In order to calculate the measurement of the degree of formal harmonization of the regulations mentioned above, we resorted to the use of similarity and dissimilarity coefficients. This instrument is used in accounting studies by Fontes et al. (2005), Strouhal et al. (2009) and Strouhal et al. (2011). In this context, to achieve the objective by increasing the quality of comparative analysis performed, we proceed to calculate four coefficients reflecting the degree of correlation or association between variables (Jaccard, Rogers and Tanimoto, Kulczynski and Dice) and four coefficients which show the contrast (Jaccard distance, Squared Euclidean distance, distance Hammin, and coefficients Lance and Williams). Thus, the implementation of these coefficients in the accounting field, more precisely leasing, for determining the compatibility between two or more accounting systems (for our analysis: the accounting systems IAS 17 and MPFO 3055/2009 valid on 31.12.2011), formulas calculation of the coefficients are given in the Table 1 below.

Table 1 Formulas for the calculation of the coefficients that measure the degree of similarity/dissimilarity between two sets of regulations Simmilarity coefficients Variables used in the calculation of binary similarity/dissimilarity Jaccard a / (a + b + c) _{a = number of elements}

which take the value 1 in both regulations b = number of elements which take the value 1 in IAS 17 and 0 in the MPFO 3055/2009

c = number of elements which take the value 0 in IAS 17 and 1 in the MPFO 3055/2009

d = number of elements which take the value 0 in both regulations

Regulation Criterion 1 0 Rogers and

Tanimoto (a + d) / (a + d + 2*(b + c))

Kulczynski a/(b+c) IAS 17 1 a = 1/1 b = 1/0

Dice 2a/(2a+b+c) Disimmilarity coefficients Jaccard distance (b+c) / (a + b +c) Squared Euclidian Distance ¥b + c MPFO 3055/2009 0 c = 0/1 d = 0/0 Hamming distance b + c Lance and Williams (b + c) / (2a + b + c) Source: Authors

In order to perform the diagnosis on the degree of harmonization between the two regulations were chosen the following criteria:concepts, initial recognition, subsequent measurement, disclosures, sale and leaseback transactionsand the recognition of finance leases.Based on the facts established and analysed for each of the 6 criteria analysed both from IAS 17 and the MPFO 3055/2009, a comparison was made between the two regulations. Thus, for each of the chosen criteria the study determines the similarity and diversity of the two regulations. For this, we conduct a binary coding of the 82 elements analysed, using the value "1" to reflect the presence of an element analysed in the regulation, respectively "0" to reflect its absence (Appendix 1).

4.Analysis of the Degree of Harmonization Between IAS 17 Leases and Accounting Treatment of Leases

in the MPFO 3055/2009

The similarity and dissimilarity coefficients for each criterion analysed demonstrate that Romanian lease accounting regulations differ from IAS 17, 78% according to Jaccard distance and 64% according to Lance and Williams coefficient, regarding the complexity and the requirements imposed by the six criteria. Similarity coefficients have very low values as shown in the Table nr.2.

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Table 2 Results

Jaccard Rogers and Tanimoto

Kulczynski Dice Jaccard distance Squared Euclidian distance Hamming distance Lance and Williams 1. Concepts 0.13 0.07 0.14 0.22 0.87 4.58 21.00 0.78 2. Initial recognition 0.23 0.13 0.30 0.38 0.77 3.16 10.00 0.63 3. Subsequent measurement 0.43 0.27 0.75 0.60 0.57 2.83 8.00 0.40 4. Disclosures 0.00 0.00 0.00 0.00 1.00 4.24 18.00 1.00 5. Sale and leaseback transactions 0.25 0.14 0.33 0.40 0.75 2.45 6.00 0.60 6. The recognition of finance leases 0.67 0.50 2.00 0.80 0.33 1.41 2.00 0.20 TOTAL _{0.22 0.12 0.28}_{0.36 0.78}_8.06_{65.00 0.64} Source: Authors

Thus, the concepts in regulations differ 87% according to Jaccard distance coefficient and 78% according to Lance and Williams coefficient. Moreover, 21 of them are not in the MPFO 3055/2009, and similarity coefficients take very small values: Jaccard coefficient has the value 0.13, Rogers and Tanimoto has 0.07, 0.14 is Kulczynski coefficient and respectively Dice takes the value 0.22. Only three concepts are in both regulations, ie lease, operating lease and finance lease.

The common elements of the two regulations regarding the initial recognition of leases are: lease payments under an operating lease shall be recognised by the lessee as an expense; the lessors shall recognise assets held under a finance lease in their statements of financial position and present them as a receivable; the lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset. The small values of the coefficient of dissimilarities (0,77 - Jaccard distance and 0,63 - Lance and Williams coefficient) show the great difference treatment of this criterion in regulations.

The similarity coefficients regarding the subsequent measurement of leases are relatively high: Jaccard coefficient has the value 0.43, Rogers and Tanimoto has 0.27, 0.75 is Kulczynski and respectively Dice takes the 0.60 value. Thus, eight items are different in the two regulations, and 6 elements are found in both regulations. Disclosure of leases is the criterion with the highest values of the coefficients of dissimilarities. Jaccard distance and Lance and Williams coefficient have the value 1 and Squared Euclidean distance is 4.24. Thus, this criterion is characterized by the fact that all 18 elements found in IAS 17 are not in the MPFO 3055/2009.

The elements on sale and leaseback transactions in the analysed regulations are 75% treated differently according to Jaccard distance and 60% according to Lance and Williams coefficient, which shows the difference quite high on this criterion between the two regulations. The criterion with the highest degree of similarity is the recognition of a finance lease. All four coefficients of similarity reach a higher value for the

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criterion compared with the other five criteria. Thus, the value of Jaccard coefficient is 0.67, Rogers and Tanimoto has 0.50, Kulczynski is 2.00 and the value of Dice is 0.80.

5.Conclusions

After conducting the analysis on the progress of implementation of IAS 17 Leases in the Romanian accounting system it can be concluded that the two regulations are similar only 22% according to Jaccard coefficient, 12% according to Rogers and Tanimoto coefficient, 28% according to Kulczynski coefficient and 36% according to Dice coefficient. The Romanian regulation differ 78% according to Jaccard distance and 64% according to Lance and Williams coefficient in terms of complexity and requirements imposed by the six criteria. Also, by calculating the coefficients of similarity and dissimilarity for each criterion analysed on lease accounting the study demonstrates that the classification of a finance lease is the criterion with the highest similarity coefficients and disclosure differs totally in the two regulations.

As the IASB and FASB have initiated a joint project to develop a new approach to accounting for leases, it will be interesting in pursuit of how will change MPFO 3055/2009 after issuing the new international accounting standard on leases. Future studies may wish to explore the formal harmonization of other international accounting standards with Romanian regulations.

References

De Martino, G. (2011). Considerations on the subject of lease accounting. Advances in Accounting, 27(2), 355-365.

Duke, J. C., Hsieh, S. J., & Su, Y. (2009). Operating and synthetic leases: Exploiting financial benefits in the post-Enron era. Advances in Accounting, 25(1), 28-39.

Fabozzi, F. J., & Choudhry, M. (Eds.). (2004). The handbook of European structured financial products (Vol. 131). Wiley.

Fontes, A., Rodrigues, L. L., & Craig, R. (2005). Measuring convergence of national accounting standards with international financial reporting standards. In Accounting Forum (Vol. 29, No. 4, pp. 415-436). Elsevier.

Jensen, M.C. and Smith, C.W. Jr (1984), “The theory of corporate finance: a historical overview”, The Modern Theory of Corporate Finance, McGraw Hill, New York, NY, pp. 2-20.

Knubley, R. (2010). Proposed changes to lease accounting. Journal of Property Investment & Finance, 28(5), 322-327.

McGregor, W. (1996). Accounting for leases: A new approach. Stamford CT: Financial Accounting Standards Board.

Lin, J. R., Wang, C. J., Chou, D. D. W., & Chueh, F. C. (2012). Financial Constraint and the Choice between Leasing and Debt. International Review of Economics & Finance.

Lipe, R. (2001). Lease accounting research and the G4+1 proposal. Accounting Horizons, 15(3), 299–310.

Lyon, J. (2010). Accounting for leases: telling it how it is. Journal of Property Investment & Finance, 28(5), 328-332.

Qian, W., & Burritt, R. (2011). Lease and service for product life-cycle management: an accounting perspective. International Journal of Accounting and Information Management, 19(3), 214-230.

Quirke, B. J. (1996). Leasing the environment. Sustainable Development, 4(2), 98-102.

Ryan, S. (2001). Evaluation of the lease accounting proposed in G4+1 special report. Accounting Horizons, 15(3), 289–298.

Strouhal, J., Bonaci, C., Mustata, R., Alver, L., Alver, J., & Praulinš, A. (2011). Accounting Harmonization Measurement: Case of Emerging CEE Countries. International Journal of Mathematical Models and Methods in Applied Sciences, 5(5), 899-906.

Strouhal, J., Müllerová, L., Cardová, Z., & Paseková, M. (2009). National and International Financial reporting rules: testing the comparability of Czech Reporting from the SMEs perspective. WSEAS Transactions on Business and Economics, 6(12), 620-629. Terry, B. J. (1997). The international handbook of corporate finance. Routledge.

Wong, B., Ho, D. & Kan, S. (2010). International Lease Accounting and Tax Consequences: The Hong Kong Perspective. International Journal of Economics and Finance, 2(4), p233.

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Appendix A. MPFO 3055 VS. IAS 17 Leases

ELEMENTS IAS 17 MPFO

3055/2009 a b c d

1. CONCEPTS 3 21 0 0

lease 1 1

finance lease 1 1

operating lease 1 1

A non-cancellable lease is a lease that is cancellable only upon the

occurrence of some remote contingency 1 0

A non-cancellable lease is a lease that is cancellable only with the

permission of the lessor 1 0

A non-cancellable lease is a lease that is cancellable only if the lessee enters into a new lease for the same or an equivalent asset with the same

lessor 1 0

A non-cancellable lease is a lease that is cancellable only upon payment by the lessee of such an additional amount that, at the inception of the lease,

continuation of the lease is reasonably certain 1 0

The inception of the lease 1 0

The commencement of the lease term 1 0

The lease term 1 0

Minimum lease payments 1 0

Fair value 1 0

Economic life is the period over which an asset is expected to be economically usable by one

or more users 1 0

Economic life is the number of production or similar units expected to be

obtained from the asset by one or more users 1 0

Useful life 1 0

Guaranteed residual value 1 0

Unguaranteed residual value 1 0

Initial direct costs 1 0

Gross investment in the lease 1 0

Net investment in the lease 1 0

Unearned finance income 1 0

The interest rate implicit in the lease 1 0

The lessee’s incremental borrowing rate of interest 1 0